|
Jun. 10, 2011: More on REIT's; no IPO yet for Ally; Treasury & Making Home Affordable Program results
Rob Chrisman
If
someone “about scares you half to death” twice, what happens?
What home builder economists lower their predictions twice, what
happens? http://blogs.wsj.com/economics/2011/06/08/home-builders-economist-lowers-2011-housing-market-forecast/?modWSJBlog&modmarketbeat.
In a similar vein,
Federal Reserve Vice Chairman Janet Yellen said the housing
market will undergo a “long, drawn-out recovery” and the
Fed is working with other agencies to prevent
foreclosures and clear the stock of vacant properties. “Looking
forward, I unfortunately can envision no quick or easy solutions
for the problems still afflicting the housing market. Even once
it begins to take hold, recovery in the housing market likely
will be a long, drawn-out process.” This is nothing that should
surprise anyone in our business, although it is sobering.
If I want my
neighbor’s help in moving some boxes, I don’t tell him to get
his dog out of my yard first. (I know, bad analogy, but at 4AM I
couldn’t come up with anything better.) Things tend to become
more muddled with large companies and governments are involved.
For example, on the one hand numerous representatives and
regulators are calling for the phase out of Fannie & Freddie
with their replacement being the private sector (assumed to be
banks). On the other hand, these same companies in the private
sector continue to keep reserves, not knowing what the next
lawsuit or buyback or servicing penalty will be. The latest news
involves the HAMP program: while servicers are required to
address all instances of non-compliance, beginning this month, the
Treasury Department is withholding financial incentives for
three servicers, Bank of America, JPMorganChase and Wells
Fargo. (Ocwen slid by and did not have its
financial incentives taken away, in spite of also needing
substantial improvement, due to its compliance results being
substantially and negatively affected by a large servicing
portfolio acquired during the compliance testing period.)
The results come from
HUD and the U.S. Department of the Treasury’s May edition of the
Obama Administration's Housing Scorecard, which now include
detailed assessments for the 10 largest mortgage servicers
participating in the Administration’s Making Home Affordable
Program. Three categories make up the analysis:
identifying and contacting homeowners, homeowner evaluation and
assistance, and program reporting, management and governance. It
is not a drop in the bucket: in April, 29,000 homeowners
received a trial Home Affordable Modification Program (HAMP)
modification, and 29,000 additional homeowners received a
permanent modification.
In other
corporation-related news, Ally Financial is postponing its
$5 billion IPO because of weak market conditions and
impending fines due to its mortgage foreclosure practices. Our
government owns nearly 74% of the lender due to past bail outs -
the government invested $17bn in Ally in a series of rescues: http://www.sfgate.com/cgi-bin/article.cgi?f/g/a/2011/06/10/bloomberg1376-LMJRUZ07SXKY01-3G43RHUMIBJENHGRUTMJJMDB8V.DTL.
I have an important
correction to some information regarding a Freddie Mac program,
more specifically Freddie Mac’s Relief Refinance
offering relating to why Fannie loans might be paying off faster
than Freddie program loans. I stated that, "Freddie’s plan must
be refi’d in the name of the servicer..." Folks, including me,
should note that, rep & warrant issues aside, with the
Freddie Mac Relief Refinance - Open Access through LP, any lender can participate in the offering even
if they do not currently service Freddie Mac Mortgages. This
offering continues to offer up to 125% LTV and a transfer of the
existing MI giving borrowers more refinance opportunities. One
change that was made with the HARP extension is that Fannie Mae
aligned their eligibility date to the May 31, 2009 date that
Freddie Mac's program already had, so an additional 3 months of
production are now available for Fannie HARP. I apologize for
any confusion.
Yesterday the
commentary discussed the continued publicity surrounding REIT’s,
and their impact on the residential mortgage market. But one
seasoned vet wrote, "I still struggle with the mortgage REIT
concept. Or, more specifically, I have a hard time seeing why
anyone would pay much more than book value plus the present
value of the leveraging benefits and the tax shield minus
corporate operating expenses. I say this because if the
economic value of the loans owned goes much higher than par, the
risk that the borrower refinances and involuntarily takes the
asset value increase away from the REIT is palpable. In return
for the right to have a vehicle that can have assets
involuntarily called away, you have to rely on the capital
markets for funding and go through all kinds of gyrations in
order to preserve the tax benefit. I know It’s a golden age for
mortgage REITs now since the yield curve is steep, mortgage
capital is plentiful and prepayment nirvana continues but
whether those three conditions persist indefinitely is another
question altogether. And, of course, the cynic in me can’t
help noticing Wall Street’s zeal to bring these things public
now."
Companies using a
REITs tax designation must meet certain criteria regarding their
investment portfolios and must distribute 90% of taxable income
as dividends - the trust pays no state or federal corporate
taxes on dividends paid to investors. Investors are attracted to
REITs for high ongoing dividend payments, but setting one up is
not a slam-dunk.
Not only do they have
the 90% requirement noted above, it must be an entity that is
taxable as a corporation and be managed by a board of directors
or trustees. It must have shares that are fully transferable and
have a minimum of 100 shareholders. In addition, no more than
50% of its shares should be held by five or fewer individuals
during the last half of the taxable year. A REIT must invest at
least 75% of its total assets in real estate assets and derive
at least 75% of its gross income from rents, from real property
or interest on mortgages financing real property. It should have
no more than 25% of its assets consist of stock in taxable REIT
subsidiaries. Due to the high payout ratio, REITs routinely
issue secondary offerings because they are unable to increase
their capital base using retained earnings. And, aside from
reminding folks that this is not a complete list of requirements
– for that talk to a mortgage tax attorney - a mortgage REIT
must invest at least 55% of its assets in “qualifying
interests.” To meet this test, an agency mortgage REIT invests
55% of its assets in whole pools, that is, pools with undivided
interest in a mortgage. [More on REIT’s on Monday.]
For anyone waiting to
lock, once they actually process a file (and from what I am
hearing, there are very few easy refi’s), rates continue to be
low. Yesterday the yield on the risk-free Treasury closed at
3.00%, worse in price by about .250. MBS prices fell 3/8s of a
point on Fannie 3.5’s, and about .250 on 4’s (containing
4.25-4.625% loans). But this was after starting off the day with
the 10-yr down at 2.92%, so as we sold off investors sent out
intra-day price changes. And overall, volume was substantially
above normal Thursday with better selling when all was said and
done. The $13 billion 30-yr auction was “sloppy”.
Today… there ain’t
much. We had Import Prices +.2% for May, as were Export Prices.
Stocks are pointing lower (again), but that is about it for
scheduled news. The 10-yr is down to 2.97% and MBS prices
are slightly better – but depending on what investors did
with their rates yesterday, mortgage prices may not show much
change.
Tech Support: “I need
you to right-click on the Open Desktop.”
Customer: “OK.”
Tech Support: “Did you get a pop-up menu?”
Customer: “No.”
Tech Support: “OK. Right-Click again. Do you see a pop-up
menu?”
Customer: “No.”
Tech Support: “OK, sir. Can you tell me what you have done up
until this point?”
Customer: “Sure. You told me to write 'click' and I wrote
'click'.”
------
Tech Support: “OK. At
the bottom left hand side of your screen, can you see the 'OK'
button displayed?”
Customer: “Wow! How can you see my screen from there?”
------
Caller: “I deleted a
file from my PC last week and I just realized that I need it.
So, if
I turn my system clock back two weeks will I get my file back
again?”
If you’re interested,
visit my twice-a-month blog at the STRATMOR Group web site
located at www.stratmorgroup.com . The current blog
is new and takes a look at the opinions on QRM’s impact on our
industry. If you have both the time and inclination make a
comment on what I have written, or on other comments so that
folks can learn what’s going on out there from the other
readers.
|
